Business Organizations
Authors:
Freer, Richard D. / Moll, Douglas K.
Edition:
1st
Copyright Date:
2013
22 chapters
have results for business associations concise hornbook
Preface 2 results
- This book is designed for use in law school courses that focus on Business Organizations. Although course names differ from school to school, the book is ideally suited for courses such as “Business Organizations,” “Business Associations,” “Agency, Partnerships, and Limited Liability Companies,” or “Unincorporated Business Associations.” If we have done our jobs, reading this book will provide you with a solid grounding in the law of agency, general partnerships, corporations, limited partnerships, limited liability partnerships, and limited liability companies.
- We very much hope that you will find this book to be informative, “user-friendly,” and enjoyable. Most importantly, we hope that the book will help you learn about a subject that is of great significance to a tremendous number of companies and individuals—the law of business organizations.
- Open Chapter
Chapter 1. Introduction 24 results (showing 5 best matches)
- Chapter 3 explores the general partnership—an association of two or more persons to carry on, as co-owners, a business for profit. Among the modern forms of business organization that involve two or more owners, the general partnership is unique in that it can be informally created. Put differently, establishing a general partnership does not require the filing of an organizational document with the state. So long as two or more persons are carrying on, as co-owners, a business for profit, a general partnership is created, regardless of whether the co-owning persons intended that result.
- Chapters 4–13 examine the corporation. Whether you are taking a course on Corporations, Business Associations, or Business Organizations, the centerpiece of your study will be the corporation. It has been the dominant business form in the United States since the early days of independence. Under all corporation statutes, a corporation is viewed as a separate legal entity whose identity is distinct from that of its owners (known as “shareholders”). In contrast to a general partnership, a corporation is consciously formed by filing an organizational document with the state. Unlike general partners, shareholders have no right to participate in the management of the business (except in certain extraordinary situations, such as mergers). Perhaps most importantly, a corporation provides its shareholders with limited liability for the obligations of the business. In a lawsuit against a corporation, a shareholder’s personal assets are not at risk; instead, the most that a shareholder can...
- The study of business organizations is, broadly speaking, a study of how people engage in business and, more importantly, how the law facilitates and regulates the operation of such businesses. This book examines many of the legal rules and doctrines associated with running a business—from formation to dissolution to everything in between. These rules and doctrines are explored within the context of the various organizational forms in which a business may be operated.
- Chapter 2 examines the law of agency—the law governing the relationships between principals, agents, and third parties. Although agency law applies to all forms of business, it is frequently invoked when dealing with the most basic (and most common) form, the sole proprietorship. A sole proprietorship is a business owned by a single individual that is not operated as a corporation or other special legal form. The major advantage of a sole proprietorship is that it is easy to establish—the proprietor simply begins to conduct business. In some jurisdictions, a proprietor using an assumed name for the business must also file an “assumed name” or “fictitious name” certificate with the county clerk specifying the name of the owner and the name of the business. The major disadvantage of a sole proprietorship is that the owner is liable for the obligations of the business. Debts of the business, in other words, are viewed by the law as debts of the owner, and the owner’s personal assets...
- First, if somebody furnishes money for our business, what does she expect in return? For instance, does she want a guarantee of repayment plus interest, a share in profits, a voice in management of the business, or some combination of these things? The answer to these questions will determine whether we raise capital through “debt” or “equity.” If you majored in sociology in college, these terms may scare you, but they should not. Debt means a loan—the business borrows money and must repay it (with interest as specified in the contract). The person who lends money becomes a creditor of the business, but is not an owner of the business. Equity, in contrast, means ownership—the person invests in the business and gets an ownership interest. The business can raise capital either by getting loans or by selling ownership interests (or by some combination).
- Open Chapter
Chapter 4. The Corporation: Overview, Theory, and History 44 results (showing 5 best matches)
- conduct a business. In famous terms, Professor Wesley N. Hohfeld summarized: “[I]t has not always been perceived … that transacting business under the forms, methods, and procedure pertaining to so-called corporations is simply another mode by which individuals or natural persons can enjoy their property and engage in business. Just as several individuals may transact business collectively as partners, so they may as members of a corporation—the corporation being nothing more than an association of such individuals…”
- Second, “Subchapter K” applies to partnerships and “associations taxable as partnerships.” It provides that these businesses are not separate taxable units. Instead, any tax consequences of their activities are passed through to the owners of the enterprise (hence the phrase “pass-through” taxation). The partnership files an informational tax return on which it shows its business income (or loss) and allocates gains, losses, income, and deductions to each partner. Each partner then includes those items in her individual income tax return. “K taxation” is an advantage over “C taxation.” The partners pay income tax at the individual level, but the business does not pay a separate tax.
- The contrary argument is that the goal of business is to make money, period. If you want to use the money you make through business to “do good,” great—but do it with your money, not the corporation’s. This view is essentially —that the government should leave corporations alone and let them tend to business and the bottom line.
- Beginning in the late nineteenth century, several states tried to attract businesses to incorporate or reincorporate even though the corporations planned to do no business there. They amended their statutes to simplify procedures, relax restrictions and limitations, reduce fees, and generally make things more attractive; the goal was to attract incorporation of large corporations. Why would states compete for the incorporation business? Money. States charge fees to incorporate and to maintain corporate status. They also impose franchise taxes on corporations, often based upon the company’s assets. And there may be state income taxes as well. Today, between 15 and 20 percent of Delaware’s total budget is generated by franchise taxes paid by corporations. Insurance firms, corporation service companies, and major law firms with principal offices in other states maintain offices in Wilmington; these businesses would be a small fraction of their present size if Delaware’s corporation
- In determining what form of business best suits a client’s needs, the business lawyer must consider income tax ramifications. Federal income tax law has three basic regimes for taxation of businesses, routinely referred to by the subchapter of the Internal Revenue Code dealing with that regime.
- Open Chapter
Chapter 3. The General Partnership 125 results (showing 5 best matches)
- The general partnership is unique among business organizations with two or more owners because its formation does not require a public filing with the state. Instead, under UPA, a general partnership is formed whenever there is an “association of two or more persons to carry on as co-owners a business for profit.” Both UPA and RUPA contain rules for determining whether a partnership has been formed. The most important of these rules is that a person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of a debt, as wages, or for other listed exceptions.
- RUPA § 202(a) (defining a partnership as an “association of two or more persons to carry on as co-owners a business for profit … whether or not the persons intend to form a partnership”). Both UPA and RUPA recognize that partners need not be individuals; they may be corporations, partnerships, or other types of associations.
- Given these circumstances, did the relationship between the firm and Peyton, Perkins, and Freeman meet the legal definition of a partnership—i.e., an association of two or more persons to carry on as co-owners a business for profit? Several factors are worthy of discussion:
- Drashner v. Sorenson, 63 N.W.2d 255, 257–58 (S.D. 1954) (finding a term partnership based on an agreement of the parties that “contemplated an association which would continue at least until the $7500 advance of defendants had been repaid from the gross earnings of the business”).
- Under UPA § 9, a partner has authority to bind the partnership for any act that is “apparently carrying on in the usual way the business of the partnership.” This language would presumably encompass an act within the apparent course of business of the partner’s firm. It is unclear, however, whether it would also encompass an act that is not within the apparent course of business of the partner’s firm, but that is within the apparent course of business of other firms engaged in a similar line of business as the partner’s firm. There is authority under UPA for this broader construction. RUPA § 301 makes clear that a partner has authority to bind the partnership for any act that is “apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership.”
- Open Chapter
Index 22 results (showing 5 best matches)
Chapter 7. Fiduciary Duties 102 results (showing 5 best matches)
- Here we address two cases that arguably involve payments of a control premium. We say “arguably” because neither opinion is a model of clarity. Yet each has gotten considerable attention through the years and each has found its way into most Business Associations casebooks. In defendants owned 87 percent of the stock in a savings and loan association (S&L), which was closely held. The defendants wanted to create a public market for the S&L stock because, they felt, it would increase the value of their holdings. It would also guarantee a public market should they want to sell.
- Statutes Relating to the Business Judgment Rule.
- The Delaware Supreme Court held that Guth breached his duty of loyalty to Loft. He usurped a corporate opportunity. Pepsi was an opportunity for the candy company, at least in part because the cola company was in the candy company’s “line of business.” But, as we saw in Hypothetical B at the beginning of this subsection, this just begs the question: was Loft’s “line of business” to be defined narrowly (as operating candy shops) or broadly (as preparing and dispensing sweets, including soda pop)? In , the facts made the court’s decision a bit easier because Loft already manufactured syrups and served soft drinks. On the other hand, one could argue that while acquiring a source of cola syrup was in Loft’s line of business, going into the cola business was not. The court took a broad view and held that the assets of Pepsi fit into Loft’s business line. Courts employing this “line of business” test sometimes speak of an opportunity as something “logically related to the corporation’s...
- which involved a reinsurance business that had been run by a father and sons. The father died, and his widow, Mrs. Pritchard (the sons’ mother), was elected to the board. She knew nothing about business generally or about the reinsurance business in particular. Mrs. Pritchard attended no meetings and did nothing to acquaint herself with even the rudiments of the business. She was a figurehead. With their father out of the way and their mother doing nothing, the sons allegedly siphoned large sums of money from the corporation, mostly through improper payments to members of their families.
- case involved the reinsurance business, which is a specialized field. This does not mean, however, that every director must have expertise in the particular business engaged in by the corporation. Indeed, in
- Open Chapter
Chapter 15. The Limited Liability Partnership 13 results (showing 5 best matches)
- With respect to formation, therefore, an LLP must fall within the statutory definition of a partnership—i.e., an association of two or more persons to carry on as co-owners a business for profit. Beyond meeting the partnership definition, an LLP must satisfy certain statutory formalities. Most importantly, an LLP is required to file a document (generally called an application, registration, or certificate) with the secretary of state or other designated official. The document must provide prescribed information, which usually includes, among other items, the firm’s name (which ordinarily must contain the “LLP” abbreviation or the “limited liability partnership” term), the firm’s address, and a statement of its business or purpose.
- The LLP form of business organization is a relatively recent development. Texas passed the first LLP statute in 1991 as a result of leading the nation in bank and savings and loan failures in the 1980s. The Federal Deposit Insurance Corporation and related governmental entities brought lawsuits against hundreds of shareholders, directors, and officers of these failed financial institutions in an effort to recover funds. When the amounts recovered from the principal wrongdoers amounted to only a tiny fraction of the total losses, malpractice lawsuits were then directed against the lawyers and accountants who had represented the failed institutions. The fear of massive personal liability on the part of “innocent” partners for the banking work of fellow partners spurred a vigorous lobbying effort that ultimately resulted in the passage of the first LLP statute. Other states followed suit, and the LLP quickly became a viable business option across the country.
- Of course, the “birth” of the LLP arose out of the savings and loan crisis and partners’ concerns about exposure due to their fellow partners’ malpractice. Thus, the early statutes focused on providing limited liability to partners for the firm’s tort obligations. Partner exposure for the contractual obligations of the business was, as an initial matter, simply not a primary concern.
- Some LLLP provisions, however, speak only of general partners receiving LLP liability protection. In these jurisdictions, limited partner liability in an LLLP is presumably no different from limited partner liability in a traditional limited partnership. Notice, however, that this results in a peculiarity. In a RULPA (1985) limited partnership, a limited partner who participates in the control of the business can become personally liable for at least some of the venture’s obligations. When a limited partnership has elected LLLP status, however, a general partner can participate in the control of the business without becoming personally liable for any of the venture’s obligations.
- (2)(a) A partner in a limited liability partnership is not liable, directly or indirectly, including by way of indemnification, contribution or otherwise, for a debt, obligation, or liability chargeable to the partnership arising from negligence, wrongful acts, or misconduct committed while the partnership is registered as a limited liability partnership and in the course of the partnership business by another partner, or an employee, agent, or representative of the limited liability partnership.
- Open Chapter
Chapter 14. The Limited Partnership 52 results (showing 5 best matches)
- For example, RULPA (1985) now explicitly permits entity general partners. Section 101(5) defines a “general partner” as a “person,” and § 101(11) includes a natural person, general partnership, limited partnership, association, or corporation within the definition of a “person.” Further, RULPA (1985) § 303(b)(1) explicitly states that a limited partner “does not participate in the control of the business” by “being … an agent or employee … of a general partner or being an officer, director, or shareholder of a general partner that is a corporation.” a creditor is dealing with a separate legal entity. Moreover, because business entities can only function through their individual managers, it is usually more accurate to say that limited partners were exercising control merely in their managerial capacities, not in their limited partner capacities.
- For many years, the limited partnership stood alone as the only business form that provided the best of both worlds—the corporate trait of limited liability, and the partnership traits of pass-through taxation and structural flexibility. With the birth of the limited liability partnership (“LLP”) and the limited liability company (“LLC”), however, the modern business owner now has multiple options that fuse limited liability, operational flexibility, and favorable tax treatment. As a result, a number of commentators have predicted that the usage of the limited partnership will dramatically wane. Nevertheless, keep the following in mind: (1) the relatively long history of use of limited partnerships in this country has produced a level of comfort among many attorneys and business owners with that form; (2) that same history of use has generated a significant body of common-law precedent that makes the limited partnership’s operation more “predictable” than newer business structures;...
- liability: “However, if the limited partner’s participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he [or she] is liable only to persons who transact business with the limited partnership with actual knowledge of his participation in control.” RULPA (1976) § 303(b) also added a “safe harbor”—i.e., a list of protected limited partner activities that did not constitute “participat[ion] in the control of the business.” The list included, among other activities, “consulting with and advising a general partner with respect to the business of the limited partnership,” “being a contractor for or an agent or employee of the limited partnership or of a general partner,” “acting as surety for the limited partnership,” and voting on various listed matters.
- With each version of NCCUSL’s limited partnership statute, the control rule has become progressively more protective of limited partners. Section 7 of the 1916 ULPA stated, in its entirety, that “[a] limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.” There was considerable doubt under this sparse language as to how much activity by the limited partner would constitute “tak[ing] part in the control of the business” with the corresponding liability of a general partner. For example, could limited partners advise general partners and consult with them on business issues? Could a limited partner act as an employee, agent, or surety of the limited partnership? Could limited partners retain the power to remove a general partner and to elect another person for the position? Finally, could a limited partner be granted the power to vote for or against...
- Second, what was G.B. Investment’s alleged participation in control? According to Ellsworth’s affidavit, some examples included the following: (1) Anderson/McHolm directed the operation of the business and instructed Ellsworth to make certain operating changes; (2) G.B. Investment negotiated a line of credit for the business (i.e., it obtained financing for the partnership) and guaranteed the loan; (3) significant business decisions had to be approved by Anderson/McHolm, and Anderson/McHolm directed Ellsworth to carry out certain decisions; (4) Anderson/McHolm dictated the accounting procedures to be followed by the partnership; (5) Anderson/McHolm had to approve all partnership expenditures and Anderson had to ..., were at the partnership’s office on a frequent basis, that Ellsworth reported directly to them, that daily operations of the partnership were reviewed by representatives of G.B. Investment, and that Ellsworth had to get their approval before making certain business...
- Open Chapter
Chapter 10. Finance, Issuance, and Distributions 53 results (showing 5 best matches)
- In the business world, debt means exactly what it means in our everyday world—you borrowed money and must pay it back, with interest, on terms specified in the contract. Whoever lends capital to the business is a creditor (not an owner) of that business. She is entitled to be repaid, but will not share in a proportionate way if the business is successful. Even if the business does poorly, the creditor has a right to repayment. Equity, in contrast, means ownership. One who makes an equity investment in a corporation gets stock in the business. She is an owner (not a creditor) of the corporation. She is entitled to share in the success of the business, but may lose her investment if the company does poorly.
- Your friend is forming a corporation to manufacture widgets. She needs $20,000 to get the business going. She will put in $10,000 of her own money and wants you to provide the other $10,000. You agree. Now, do you lend the money to the business or do you buy an equity interest in the business?
- In general terms, debt is riskier for the business because it must be repaid. On the other hand, if the business does well, the gain does not have to be shared with the lender. Equity is riskier for the investor because she can lose her investment. So why wouldn’t businesses always use equity financing? For one thing, it may be difficult to get. People (and banks) may be more willing to lend to an unproven business than to own a piece of it. For another, owners of stock usually have the right to vote. So issuing stock means sharing power with others. A founder of a business may want to retain control and thus choose not to have the corporation issue stock to others.
- Suppose the business starts with $10,000 of cash invested by shareholders. The business assets consist of that $10,000, which is put on the left side of the balance sheet. What are the liabilities? There are none—because the business did not borrow the money, so it need not be paid back. So liabilities are zero. What is the equity? It is $10,000 (assets minus zero liabilities). So the balance sheet looks like this:
- Instead, assume the business started with $10,000, which it That $10,000 is debt, and must be repaid. Therefore, it is a liability. So borrowing money increases the business assets—because it gives the business money. But it creates a liability too. The balance sheet would look like this:
- Open Chapter
Chapter 2. Agency 35 results (showing 5 best matches)
- Even assuming that the control element was met, what about the “on behalf of” element of the agency inquiry? Was Warren acting primarily for the benefit of Cargill? Cargill clearly benefitted from its relationship by receiving interest on the loaned sums as well as a steady supply of grain, but Warren also benefitted by earning money from its grain resale business as well as its other business pursuits. When a debtor is attempting to generate income for itself in its own business, there is a strong argument that it is operating primarily for its own benefit rather than for the benefit of another. (Indeed, the fact that Warren’s officer salaries were high enough to prompt complaint by Cargill suggests that Warren’s officers were primarily running the business for their benefit and not for Cargill’s.) Even if the proceeds from Warren’s sales were largely used to repay the Cargill debt, it is not clear why the court did not view the debt as facilitating Warren’s own business—a business...
- In which direction do these factors cut? With respect to (a), more control by the principal over the details of the work suggests servant status. For (b), the presence of a distinct occupation or business for the worker leans toward independent contractor status, as there is some business to conduct outside of the principal’s operations. A more substantial degree of supervision in (c) indicates servant status. For (d), work which does not require the services of highly skilled individuals suggests servant status. With respect to (e), the employer providing the materials necessary for the work to be accomplished favors servant status (if provided by the worker, independent contractor status is suggested). A longer length of time of employment in (f) indicates servant status, as independent contractor assignments are often one-time engagements. Payment by time in (g) suggests servant status, while payment by the job suggests independent contractor status. The task being part of the...
- is controversial. With respect to control, when a lender finances a business, it is common for the lender to impose various conditions on how the money can be used and how the business may run its operations—e.g., the funds can be used for expansion purposes only, liabilities cannot be increased above a certain ratio or amount, decisions to sell key assets require the lender’s approval, etc. These conditions give the lender a degree of control over the business, but is that control enough to meet the element of the agency definition? Section 14O of the Second Restatement, which the court cited, provides some general guidance by stating that “[a] creditor who assumes control of his debtor’s business for the mutual benefit of himself and his debtor, may become a principal, with liability for the acts and transactions of the debtor in connection with the business.” The comment to the section, however, is more helpful:
- court seemed to believe that Warren was simply a business being run for Cargill’s advantage. In such circumstances, one can make a basic economic argument for liability: a creditor should be required to internalize all of the costs of a business being run for its benefit. Put differently, the court may have believed that Cargill’s relationship allowed it to get the benefits of Warren’s business without the accompanying obligations—a situation that is rectified by holding Cargill liable as a principal for the debts of Warren.
- ’s business. With ’s consent, the business is conducted in which are suitable for the business. The purchase has been authorized by
- Open Chapter
Chapter 5. Formation of Corporations (and Related Pre-Incorporation Activities) 59 results (showing 5 best matches)
- A corporation formed in one state may qualify to transact business in another state as a “foreign corporation.” The requirements for qualifying vary slightly from state to state, but generally are not difficult to satisfy. The foreign corporation is required to qualify only if it is “transacting business” or “doing business” in the state. Under the Commerce Clause of the Constitution, states can only require qualification by foreign corporations that are engaged in business. Intrastate business requires more activity in the state than interstate business.
- How do we draw that line? In most states, statutes create safe harbors by listing activities that will not be considered intrastate business. For example, engaging in litigation, holding meetings, maintaining bank accounts, and owning real or personal property do not constitute transacting business. Beyond that, statutes in some states attempt to define intrastate business. The California Corporations Code defines transacting intrastate business as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce.” In states lacking such statutory definition, courts have reached the same general conclusion—that transacting business involves more than sporadic activity, and requires some continuous or significant intrastate activity.
- Because no corporation was formed, the person purporting to act for the business acted on behalf of a nonexistent principal and therefore must be liable. Another possibility is to consider the form of business actually created. If the defectively incorporated business has one owner, it is a sole proprietorship. If it has more than one owner, it is a partnership. Neither of those business structures requires filing with the state; each is formed by conduct. And in each, the sole proprietor and the partners are personally liable for business debts in contract and tort. Thus, failure to achieve corporate status leaves the proprietors on the hook for personal liability because of the business structure she or they actually created.
- This law differs from state to state. As a rule of thumb, older statutes tend to impose more formalistic requirements on the formation and operation of the business, while newer statutes (typified by the Revised Model Business Corporation Act (RMBCA)) permit the proprietors to tailor their business to suit their needs. Still, no two states’ corporation laws are identical, and the proprietors will incorporate (or “charter”) in a state that makes sense for them. The overwhelming majority of corporations are small, closely held businesses, with only a handful of owners (often, in fact, with only one owner). They do business in a single state. Usually, it makes sense to form the corporation in that state.
- Now all states permit a “foreign” corporation to “qualify” to do business within its borders. So today, a company can incorporate in State A and “qualify” to do business in State B (and others). As we will see in section E of this Chapter, such qualification is rather easy.
- Open Chapter
Chapter 16. The Limited Liability Company 68 results (showing 5 best matches)
- The limited liability company (“LLC”) is a noncorporate business structure that provides its owners, known as “members,” with several benefits: (1) limited liability for the obligations of the venture, even if a member participates in the control of the business; (2) pass-through tax treatment; and (3) contractual freedom to arrange the internal operations of the venture. Because of this favorable combination of attributes, the LLC has emerged as the preferred business structure for many closely held businesses. in mind, however, that the LLC is a relatively new form of business organization in this country. Although its “birth” dates back to 1977, its widespread use is more recent. Compared to other forms of business organization, therefore, the LLC is less established, and lawyers and courts continue to wrestle with many open questions.
- Attorney and business owner inertia
- , Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998) (“Given the resemblance between an LLC and a limited partnership, and what seems to have crystallized as a principle that members of associations are citizens for diversity purposes unless Congress provides otherwise (as it has with respect to corporations, in 28 U.S.C. § 1332(c)(1) [deeming that a corporation is a citizen of the state where it incorporated and the state where it has its principal place of business]), we conclude that the citizenship of an LLC for purposes of the diversity jurisdiction is the citizenship of its members.” (citations omitted)).
- , what about § 301(b)? Jerez would have had apparent authority to enter into the transaction so long as the transaction was considered to be “in the ordinary course of the company’s business or business of the kind carried on by the company.” Borrowing money would seem to be within the ordinary course of the company’s business, but would pledging the only significant asset of the company as security for the loan take the transaction outside of the ordinary course? One would think so, but some expert testimony may be needed here.
- The text of § 18–802 does not specify what a court must consider in evaluating the “reasonably practicable” standard, but several convincing factual circumstances have pervaded the case law: (1) the members’ vote is deadlocked at the Board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate. These factual circumstances are not individually dispositive; nor must they all exist for a court to find it no longer reasonably practicable for a business to continue operating. … If a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.
- Open Chapter
Chapter 8. Special Issues in the Closely Held Corporation 44 results (showing 5 best matches)
- Third is the question of liability for business debts. While partners generally are liable for debts incurred in the operation of the business, the corporation, in contrast, features limited liability. Thus, generally, shareholders are not liable for business debts. On the other hand, though, if the corporation is run like a partnership, there may be circumstances in which limited liability will not apply. As we will see in section E, under the doctrine of “piercing the corporate veil,” shareholders may be personally liable for what the business does.
- The principal advantage of the corporation over the sole proprietorship and the partnership is limited liability. The owners are not liable for debts incurred by the business. This is true even if there is only one shareholder; the entity, not the shareholder, is liable for debts incurred by the business. Shareholders may lose the money they invested if the business does poorly, but they are not liable for the corporation’s breaching a contract, incurring a debt, or committing a tort. Because of limited liability, a creditor must seek payment only from the corporation.
- Inadequate capitalization (or “undercapitalization”) means that the company lacks sufficient resources to cover prospective risks. It is assessed based upon likely economic needs in the specific line of business. This assessment is more art than science. It seems clear that the company need not be capitalized to ensure that it can pay for every conceivable liability. Capitalization should be reasonable in light of the nature and risks of the business. In making the assessment, liability insurance “counts” as capital because it is available to compensate plaintiffs injured by the business.
- creates a significant risk of judicial overreaching by permitting courts to review business decisions. Consider again the hypothetical above, in which X, the minority shareholder, was fired from her employment with the corporation. It is possible that she was fired oppressively, for an improper motive. But it is also possible that the firing was justified. Perhaps, for example, she was incompetent, or maybe the company did not need so many employees, or maybe different skills were required in the job. These are all business decisions to which courts usually extend a presumption of correctness through the business judgment rule. A broad interpretation of would convert these from matters of business judgment to litigable matters of fiduciary duty.
- In the partnership, a partner might be able to force the business to dissolve and liquidate. In contrast, as we will see at Chapter 12, shareholders have no general right to force dissolution and liquidation. At any rate, dissolution and liquidation may not be preferred because the process will cease the existence of what could be a very profitable business.
- Open Chapter
Chapter 9. Special Issues in the Publicly Traded Corporation 26 results (showing 5 best matches)
- • Buying a business that increases the chances that the threatened takeover will give rise to antitrust problems by concentrating too much power in a business area.
- Board reactions to takeover attempts raise an important question. On the one hand, they look like any other business decision, so the board’s choice should be protected by the business judgment rule. On the other hand, though, the defensive tactics might be seen as efforts by directors to hold onto their own positions. After all, if the bidder is successful, she will likely replace the present board. So fending off a hostile takeover might be seen as a conflict-of-interest situation, in which the business judgment rule would not apply.
- This is true even when the corporation does not do business in the state of formation, because the corporation nonetheless pays fees and taxes in that state. If the corporation also does business in the state, it is even more important to that state’s economy, because it hires people and buys things there.
- Courts have addressed the validity of various defensive tactics. In Chapter 7, we address the fiduciary duties owed to corporations by their directors. One of these is the duty of care, which means that a director must discharge her duties as a reasonable person would in similar circumstances. Board action is judged under the “business judgment rule,” which is a presumption that directors used due care in arriving at a business decision. Courts will not second-guess the wisdom of that decision unless the plaintiff can show that the directors were uninformed or that their action was essentially irrational. One of the hallmarks of the business judgment rule, however, is that it applies (and therefore protects directors from liability) only if there is no conflict of interest. It does not apply if there is a conflict—if the director is tempted to put her own interest above that of the company.
- So what have courts done? Many have simply applied the business judgment rule. For example, in a department store chain defeated an unwanted takeover bid by another retail chain. It did so by opening additional stores that created serious antitrust problems for the bidder—that is, if the bidder had succeeded, it would have gotten into trouble for having too much concentrated business power in that field. The bidder withdrew the offer. Then the price of the target company’s stock fell precipitously, in part because the company had overextended itself in acquiring so many additional stores. Minority shareholders sued the directors for damages. The majority opinion exonerated the board by applying the business judgment rule. A vigorous dissent argued, however, that incumbent managers should not be able to entrench themselves in office to the detriment of shareholders.
- Open Chapter
Chapter 12. Fundamental Corporate Changes 26 results (showing 5 best matches)
- Selling all or substantially all of a business’s assets, “not in the ordinary course of business,” is a fundamental corporate change which must be approved by the procedure detailed in section B above. Though it may seem counterintuitive that a company would sell off its assets, there are good reasons for doing so. Usually, a corporation sells its assets before undergoing a voluntary dissolution and going out of business. In the voluntary dissolution, it will use the proceeds of the sale of assets to pay creditors. Any amount left over will then be distributed to its shareholders. Thus, often, the disposition of assets is the first step in ending the company’s existence. In contrast, corporations sometimes sell their assets to raise cash to fund business operations or to invest in other ventures.
- Third, the disposition of all or substantially all assets is only a fundamental change if it is “not in the ordinary course of business.” Some corporations are in the business of selling their assets—for example, a company that buys and sells real estate. But most companies are not, and it will usually be obvious when this is true.
- Suppose the managers of a corporation decide that they would rather run their business as a limited liability company, or as a partnership. Historically, they would have to dissolve the corporation and form a new business. Increasingly, this is unnecessary because states permit a new fundamental change: the conversion. It is exactly what it sounds like. A corporation can convert to any other form of business by going through the procedure discussed above for any fundamental change. Those states permitting conversion generally provide that a dissenting shareholder has appraisal rights.
- the plaintiff bears the initial burden of showing self-dealing by the defendant. If she does this, the burden shifts to the defendant to show: (1) a legitimate business (as opposed to personal) purpose for the transaction and (2) that the transaction was fair to the minority shareholders. Because Sullivan could not show a business reason for the merger, the court did not have to address the question of fairness.
- E. Different Ways to Combine Businesses: Merger, Consolidation, and the Share Exchange
- Open Chapter
Chapter 6. Distribution of Powers in the Corporation 40 results (showing 5 best matches)
- • Corporation sends notice of a special meeting, the purpose of which is to vote on the removal of a particular director. That is the only item of business they can transact at the meeting. They could not, for example, then vote to approve a plan to merge Corporation with another business.
- • Corporation has nine directors and no relevant corporate document defines the quorum. That means at least five of the nine must attend the meeting to constitute a quorum and conduct business. If only four directors attend, they simply cannot conduct corporate business.
- Directors’ compensation was long paid in cash. Increasingly, public corporations pay directors in stock or options to buy stock. The National Association of Corporate Directors suggested this move in the 1990s on the theory that it would align the outside directors’ interest with that of the shareholders.
- The italicized language recognizes business reality in large corporations: the board of directors does not “manage” the day-to-day affairs. Its role is more oversight than management. The modern statutes authorize corporations to vest actual management authority in the executive officers, with the board monitoring them. In smaller businesses, the board usually formulates corporate policy and authorizes important contracts. Even in such a company, however, the board may delegate details of daily operation to officers and agents.
- Assuming the shareholder is eligible, statutes also vary regarding procedure and the types of records that can be reviewed. In some states, a shareholder has a right to review some routine documents (like articles, bylaws, lists of officers and directors, and records of shareholder actions) simply by appearing at the corporation’s office during business hours and demanding to see them. In other states, however, she may see such routine documents only after making a written demand—usually five business days in advance—describing the documents sought.
- Open Chapter
Chapter 11. Potential Liability in Securities Transactions 7 results (showing 5 best matches)
- (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
- Because it applies to “any person,” Rule 10b–5 can be implicated in any business form. Thus, it might be implicated in the purchase
- , § 16(b) applies only to trading in registered securities. That means it applies only in public corporations. Rule 10b–5 applies to “any person,” so it can apply in any business, including closely held and publicly held corporations.
- Anyone with a calendar should be able to structure her buying and selling to avoid liability under § 16(b). Most cases involving liability involve inadvertence or confusion. In fairness, figuring out whether the statue applies can be confusing in some situations. For example, it may be that the actual trades were undertaken by a business and not by the statutory insider.
- Remember that § 16(b) applies only to publicly held corporations. Very few individuals hold more than ten percent of the stock of a public corporation. Such a shareholder will almost always be another business organization. Typically, it will be an aggressor trying to takeover a target by buying the target’s stock in the public market.
- Open Chapter
Chapter 13. Shareholder as Plaintiff: Derivative Litigation 17 results (showing 5 best matches)
- But why should a shareholder be able to do this? After all, whether to have the corporation assert a claim is a management decision, which should be made by the board of directors. In two situations, though, the board might not have the corporation sue. First, there might be good business reasons not to sue. For example, suppose the corporation has an ongoing relationship with a supplier, and a contract dispute arises. The corporation could sue, but it values the relationship with the supplier and decides that the parties will work out the problem in the future. A derivative suit here seems questionable because it second-guesses the kind of business decision directors are hired to make.
- The New York Business Corporation Law has an interesting provision that allows a director or officer to sue another director or officer to force her to account for breach of a duty to the corporation. The plaintiff sues in her own name, though any recovery goes to the corporation, and need not satisfy the prerequisites of a derivative suit.
- In Delaware, in a “demand required” case—that is, one in which making a demand on the board was not futile—the court generally will grant the motion to dismiss based upon the SLC’s recommendation. This makes sense. If the demand was required, there was no conflict of interest and the corporate decision should be protected by the business judgment rule.
- one substantive. First, the court must review the “the independence and good faith” of the SLC. The corporation has the burden on this point, and must show not only that members of the SLC were independent of the defendants, but that the committee undertook a reasonable investigation and had reasonable bases for its findings and recommendation. The court may permit limited discovery on these topics. Second, assuming the first requirement is met, the court undertakes an independent review of the substance of the SLC’s recommendation. The court is to apply its “own independent business judgment” to determine whether the case should be dismissed as not in the best interest of the corporation. This substantive assessment is surprising because it seems to enmesh the court in making precisely the types of business judgments that courts are not trained to undertake.
- “[I]t is arguable that a refusal by the Board of Directors, however unreasonable, should always prevent a derivative suit against a third-party wrongdoer.” Ash v. International Business Machines, Inc., 236 F. Supp. 218, 220 (E.D. Pa. 1964).
- Open Chapter
- Publication Date: February 21st, 2013
- ISBN: 9780314181336
- Subject: Business Organizations
- Series: Concise Hornbook Series
- Type: Hornbook Treatises
- Description: The study of business organizations is, broadly speaking, a study of how people engage in business and, more importantly, how the law facilitates and regulates the operation of such businesses. Written in a clear and informative style, and chock full of examples and illustrations, Freer and Moll's Business Organizations examines the legal rules and doctrines associated with running a business – from formation to dissolution to everything in between. These rules and doctrines are explored within the context of the various organizational forms in which a business may be operated. Thus, reading this book will provide you with a solid grounding in the law of agency, general partnerships, corporations, limited partnerships, limited liability partnerships, and limited liability companies.
